Earnings Call: Q3 2019

Mar 11, 2019

Good afternoon. Welcome to Aspen Group's Fiscal Year 2019 Third Quarter Earnings Conference Call. Please note that the company's remarks made during this call, including answers to questions, including forward looking statements, which are subject to various risks and uncertainties. These include statements relating to future growth, including from USU's FNP program and the Aspen University Hybrid Pre Licensure BSN campus model, student enrollments, the core Aspen Online Nursing units' expected Q4 results and marketing plans and our liquidity. Actual results may differ materially from the results predicted, and reported results should not be considered as an indication of future performance. A discussion of risks and uncertainties related to the Aspen's business is contained in its filings with the Securities and Exchange Commission mentioned in the press release issued this afternoon. Aspen Group disclaims any obligations to update any forward looking statements as a result of future developments. Also, I'd like to remind you that during the course of this conference call, the company will discuss adjusted EBITDA and EBITDA, which are non GAAP financial measures. In talking about the company's performance, reconciliation to the most directly comparable GAAP financial measures are provided in the tables in the press release issued by the company today. There will be a transcript of this conference call available for 1 year at the company's website. Now I will turn the call over to Joseph Civelli, Aspen Group's Chief Financial Officer. Officer. Good afternoon. I will begin today by reviewing our financial results for our fiscal 2019 Q3. Then we'll turn the call over to the Chairman and CEO of Aspen Group, Michael Matthews. Open, quarterly revenue was approximately $8,500,000 a 49% increase from the comparable prior year period and a sequential increase of $400,000 or 5%. In the Q3, we had solid growth at USU and our new pre licensure campus program. In fact, these 2 relatively new business units accounted in aggregate for 25% of the company's overall revenue, up from 21% the previous quarter. Just as a reminder, one of the unique features of Aspen's online core business model is that our students can choose when and how many courses they can take throughout the year, different from the vast majority of universities in America, in which students pay for their education with federal financial aid and are required to be continuously enrolled to remain eligible. As a consequence of this flexible scheduling and payment policy, Aspen Online Court sees more seasonality than other universities. As we mentioned on last quarter's call, fiscal Q1 is our slowest seasonal quarter, given it falls during the summer months, but we also see a seasonable slowdown in Q3, given it falls during the holiday period between Thanksgiving and New Year's. As a result, au online core revenue declined slightly from the Q2 by less than 1%. However, class starts before and after that were strong, so we are confident that is a seasonal dip, and we'll also expect to see in Q3 in future fiscal years. The good news is fiscal Q4 is our seasonal high point as most of the great month of January flows into revenue in Q4. So while we saw Aspen Online core revenue decline sequentially by less than 1% this quarter, in Q4, we expect revenues in Aspen Online Nursing core to rise in the range of $1,000,000 sequentially. So yes, Aspen Online Nursing Core is a bit of a whipsaw in terms of seasonality. But as we continue to get larger, have developed expertise at really understanding it and predicting it. Aspen Group's gross profit for the 3rd quarter increased to approximately $4,200,000 or a 50% margin. This represents a 46% increase in gross profit compared to last year's Q3. On a sequential basis, gross profit increased 3% and gross margin remained at 50%. Aspen University's gross profit represented 54% of Aspen University's revenue for the quarter, while USU's gross profit equaled 45% of USU's revenue for the quarter. Total instructional costs and services for the quarter rose to approximately $1,800,000 or 21% of revenue. Aspen University's instructional costs and services represented 18% of Aspen University revenue for the quarter, while USU's instructional costs and services equaled 30% of USU's revenue for the quarter. Both of these were up slightly by 1% as compared to the 2nd quarter. However, we do continue to expect USU's instructional costs as a percentage of revenue to decline as revenue grows. Marketing and promotional costs for the quarter were approximately $2,300,000 or 27% of revenue, declining from 28% as a percentage of revenue in the 2nd quarter. Aspen University's marketing and promotional costs were 25% of Aspen University's revenue for the quarter, the same as the Q2. USU's marketing and promotional costs equaled 25% of USU's revenue for the quarter, down from 27% last quarter. G and A costs for the quarter were approximately $6,300,000 compared to approximately $4,700,000 during the comparable prior year period, an increase of $1,600,000 or 34 percent and a sequential increase of approximately $100,000 or 1%. Containing G and A increases as we continue to aggressively grow revenues is the key to margin expansion. So we are satisfied with a very modest sequential increase in this area of 1%. Net loss applicable to shareholders was approximately $2,350,000 or diluted net loss per share of $0.13 for the quarter as compared to a net loss of $2,150,000 or $0.15 per share for the comparable prior year period, an increase in the loss of approximately $200,000 Aspen University generated approximately $400,000 of net income for the quarter. USU experienced a net loss of approximately $900,000 during the quarter, and AGI Corporate incurred $1,800,000 of expenses during the quarter. USU's net loss declined by over $200,000 with over half of that improvement attributable to operating income. Since USU's revenue increased by about $250,000 sequentially, USU achieved about 46% operating leverage in the quarter. With regard to our liquidity position, Aspen Group ended the quarter with approximately $4,200,000 in unrestricted cash, down $3,500,000 from the level at the end of the second quarter. Cash used in operations for the quarter was about $1,800,000 compared to $2,100,000 last quarter. We are satisfied with that sequential improvement of approximately $200,000 given revenues rose by approximately $400,000 and also considering the 3rd quarter included $160,000 annual interest expense payment that didn't occur in the 2nd quarter. Overall, cash used in the quarter of $3,500,000 was up from $2,700,000 last quarter due primarily to the repayment of $1,000,000 in principal on a convertible note related to the USU acquisition as well as the aforementioned $160,000 interest payment on that note. If not for the repayment of the convertible note and the associated interest on that note, we would have had an improvement of over $300,000 in terms of overall cash used. At the beginning of the Q3, we established a $5,000,000 revolving credit facility. Together with the $4,200,000 in unrestricted cash, that means we ended the 3rd quarter with $9,200,000 of liquidity resources. Last week, we announced that we entered into a $10,000,000 under term loan with initial maturity of 18 months and the ability for the company to extend that maturity for an additional 12 months by paying a 1% extension fee. We also announced that we repaid remaining $1,000,000 on a convertible note related to the USU acquisition, thereby eliminating the conversion option. This now gives the company approximately $9,000,000 of additional liquidity resources, clearly enough to execute on our short and long term growth plans. Mike Matthews will provide more color on our growth plans in a few minutes. But before he does, let me just say it's no secret that our valuation has slid over the last few quarters. We were concerned that the stock price remained at these levels and absent any new funding, we could find ourselves having to choose between artificially slowing growth or accessing capital on unattractive terms. We didn't like it either of those alternatives. Instead, we decided to increase debt financing in a sufficient amount that it takes those concerns off the table. While this debt is more expensive than a traditional bank line of credit, it is, however, less expensive than mezzanine debt. It is, of course, much less dilutive than equity and will allow us to continue our growth trajectory without reliance on any additional external funding. We are confident that returns to our shareholders from that growth will significantly outweigh the cost of the debt. Now I'll turn the call over to Michael Matthews. Thank you, Joe. Good afternoon, everyone. Today, I'll begin with our enrollment results followed by an operational update of our 2 newest business units, USU and our pre licensure BSN program. Then I'll end by recapping our recent accreditation announcements. Enrollments in the Q3 rose 40% year over year to 13.63. Aspen University accounted for 11 12 new student enrollments, which included 120 doctoral enrollments and 97 pre licensure BSN Arizona campus enrollments, while United States University accounted for 251 new student enrollments, which are primarily MSN family nurse practitioner enrollments. These year over year enrollment increases were a result of how we grew the call center and where we directed our increases in marketing spending. In terms of enrollment center staffing, on a year over year basis, the Aspen Online Nursing core unit remained flat at 49 enrollment advisors or EAs. The year over year increase of 21 EAs were all allocated to the 3 new business units: Aspen Doctoral, 6 EAs Aspen Pre Licensure BSN, 4 EAs and USU, 11 EAs. As we've indicated in recent quarterly calls, this shift was carefully planned as a result of these new programs delivering materially higher LTVs than our traditional Aspen Nursing core unit. Let's walk through the LTV differentials. First, our Aspen Nursing Online core unit has delivered an historical LTV of $7,350 per enrollment. Aspen's doctoral unit delivers an LTV of $12,600 per enrollment or an ARPU increase of 71%. Our USU FNP program, which today represents 84% of USU's total student body, delivers an LTV of $17,820 per enrollment or an ARPU increase of 142% relative to our conditional Aspen Online nursing core unit. Finally, we launched the Aspen BSN pre licensure hybrid campus business back in July last year and have been carefully watching the persistence of that initial cohort of 92 enrollments. Not only is this the most expensive degree program in the company at approximately $47,000 including both tuition and fees earned over a 3 year period, but we're seeing materially better persistence rates relative to our traditional Aspen online nursing core student. For example, we began our 1st BSN pre licensure semester in July with 29 students starting the final 2 year core program with all their 1st year prerequisites already completed. And 2 semesters later, we have 25 that remain in that program, meaning that we've only seen attrition of 14% to date among the initial cohort of students that began the final 2 year core program. The graduation rate for our traditional RN to BSN online program is 76%. And based on the early results from the BSN pre licensure program, we project the graduation rate for pre licensure will be in the same range, if not even higher. So we're comfortable giving guidance that our BSN pre licensure business will deliver the highest LTVs among our all of our degree programs in the company and that LTV will be at least $30,000 As the cohort continues to progress, we'll refine the LTV guidance to a more exact number. But at $30,000 per enrollment, that would deliver an ARPU increase over 300% relative to our traditional Aspen Online Nursing core unit. Given the ARPU increases across our 3 newest lines of business, it should be clear now why we have focused our growth capital on these businesses. Since we announced our $10,000,000 term loan last Thursday, a number of shareholders have asked why we decided to increase our liquidity position by approximately $9,000,000 The short answer is, we want to ensure that we have adequate liquidity to grow all 4 of our businesses over the next few years, thereby not having to pick and choose which to grow based primarily on LTV. We have lots of runway to continue capturing market share in our Aspen online nursing core unit and we plan to increase advertising spending and our enrollment team in that traditional business later this calendar year in addition to executing on our growth plans in our other three business units. With that, now I'll provide business updates on our 2 fastest growing and highest LTV businesses, USU's FNP program and Aspen's BSN pre licensure hybrid campus program. As we previously announced, USU has successfully enrolled to its target of at least 150 FNP students every other month over the past two enrollment cycles, November 2018 and January 2019 start, which represents a 100% increase from the previous target of enrolling 75 FNP students every other month. As a result, USU ended the quarter with 803 FNP students, representing 84% of USU's active student body. Assuming we continue enrolling at least 150 FNP students every other month, we're estimating by the end of next fiscal year or April 30, 2020, we'll have approximately 1400 FNP students at USU after taking graduations and other attrition into account. Another way of analyzing this growth is, should we continue enrolling 150 FNP students every other month or approximately 900 annually, assuming an LTV of $17,820 per enrollment, that means we've begun booking FNP student LTV at a rate of about $16,000,000 per year, which will be earned as additional revenue of $8,000,000 per year over a 2 year period. One final comment on our USU FNP program. We just enrolled 165 FNP students for our March start date. So we're clearly on track to continue our pace of at least 150 enrollments every other month. Now I'll provide an operational update on our Aspen pre licensure BSN program. As previously disclosed, Aspen University spent about $42,000 marketing its new pre licensure BSN program in the Phoenix Metro in the months preceding its July 2018 launch. Hold on one second, we have a fire truck. Since that initial marketing spend, Aspen has delivered 247 enrollments and begun 3 semesters, July November day program and a January night weekend program without having spent any additional marketing dollars over the past 6 months. Consequently, the cost per enrollment to date for the pre licensure BSN program has been approximately $170 As of January, when we began the night weekend program, Aspen now will start a semester every other month on a go forward basis, meaning we now have 3 day semesters per year and 3 night weekend semesters per year. As a result, Aspen has begun marketing again to maintain steady prospective student lead flow and to prepare for the launch of our 2nd campus on the north side of Phoenix in partnership with HonorHealth. The initial semester for HonorHealth is now currently targeted to begin this coming September. These two campuses in Phoenix are projected to have approximately 1,000 active students by the end of next fiscal year or by April 30, 2020. In terms of future campuses, we've set an internal goal of launching 2 campuses per year versus our original plan of 1 per year, starting in calendar year 2020. We'll be providing more details on our 2020 campus expansion plans later this calendar year. Finally, hopefully all of you have seen our 2 accreditation announcements over the past few weeks. Last year, I mentioned that as timing would have it, we had to undergo accreditation reviews at both our universities in back to back months last fall. The outcome of both reviews was a successful confirmation of each university's accreditation. In the case of USU, the regional accreditor WASC commended us for the improvements we've made since the acquisition in the areas of advising, marketing, enrollment, data analytics, technology and early warning tools to increase student success. In addition, the commission commended our commitment to creating an affordable pathway to higher education through our monthly payment plan. I'd like to end today's remarks by again thanking everyone at Aspen and at USU for their efforts and the great teamwork that led to these successful accreditation outcomes. That ends our prepared comments for this afternoon. Now we'd like to open the call to address any questions. Thank you, sir. Our first question comes from Darren Aftahi from ROTH Capital Partners. Please go ahead. Hey guys, good afternoon. Thanks for taking my questions. A couple if I may. Mike, as you're speaking on accreditation, for USU, you kind of talked about the March enrollment as being 165. I'm somewhat curious, how accreditation could potentially change that 150 or so students every other month to perhaps a bigger number. Could you indulge what that accreditation actually means in terms of that 150 every other month potentially increasing? Well, okay. So first of all, the accreditation review was from WASC, which is the regional accreditor in the Western region, which accredits institutions in California and a few other states. So they don't their accreditation is for all degree programs, not just the specific program of the master's level family nurse practitioner program. The FNP program is accredited by the State of California registered Board of Nursing. And I want you to understand that the 150 enrollments that we are currently targeting every other month, that's an internal guideline. There's no firm rules that get put into place by any regulatory bodies. We plan to maintain that 150 enrollment range every other month for the next few quarters at a minimum. And we of course work closely with the California registered Board of Nursing as it relates to our growth plan, as well as all the other support expenses involved in growing this methodically and carefully. Great. And then on pre licensure, so a couple of questions. You called out enrollment, LTV and what you spent on marketing, so ahead of the initial launch and you're sort of marketing again ahead of the launch of HonorHealth. So I'm somewhat curious, what's that marketing spend going to look like as it stands right now? And I mean, the LTV at $30,000 is one side of the equation. You've kind of given us $170,000 as the other side. I'm just sort of curious if you have any kind of sense for what that marketing efficiency ratio could actually look like longer term? Yes. I mean, I'd have to work that out for you in terms of the market efficiency ratio, but we're currently spending around about $5,000 a week, so about $20,000 a month currently. And we'll probably continue doing that pretty consistently up through the September launch of HonorHealth. So you can run the math kind of what the likely cost of enrollment will be, assuming that we bring in initially say 100 students into HonorHealth in that first semester would be probably 70 students in prerequisite and another 30 in the final 2 year core. Got it. And then just back to the And Darrin, one other thing, Darrin, that spend rate of that I just mentioned, that would include the spend rate that would support leads and enrollments for both campuses, not just HonorHealth. Got it. Thank you. And then just back to the FMT. So what would cause you to if it's internal, which I appreciate, what would cause you to increase that number or potentially make it every month? Is there an internal rate of return you need to see? Do you want more stability of metrics? What's kind of the pivot point for you to kind of increase just broader proliferation of the USU platform? Thanks. Yes, sure. That's a good question. So understand that the FNP program is a national licensure program and it's a 2 year structured program. And as soon as the student completes year 1, they have to be placed into their clinical rotation for that 2nd year. And if you don't place someone in a just in time basis, you get there's a lot of issues that would cause student complaints, their creditors would be upset, etcetera. So what's important in understanding how to develop this program is both from a faculty point of view, we have to increase the faculty over time. We have to increase the student services side of the house to support that growth. And most importantly, we have to build an office of field experience. And these are the people that are involved in placing these students into their clinicals in a just in time basis. So, we are going to look later this year at moving to enrollment on an every month basis rather than every other month. But I prefer to talk about that as the subsequent couple of quarters go by and we'll give updates at that point. Thank you. Thank you. Our next question comes from Eric Martinuzzi from Lake Street. Please go ahead. Thanks. Congrats on the 49% revenue growth. We definitely don't want to take that for granted and it's a nice accomplishment. I had a question specifically on the speaking of revenue, you talked about $1,000,000 incremental uplift sequentially expected in Q4. I know you're not specifically giving guidance for Q4, but the Street consensus right now is for about $9,900,000 in Q4. Is that within the ballpark of what you think you can do in Q4? I guess what I would say is that we're very comfortable with the current analyst consensus range. Just on a bottom line perspective, the only exception would be the of course, our interest expense is going to increase given this new term loan. Okay. Because that 9. I mean, if again, the consensus estimate would have you at about 37% growth all in. Okay. And then shifting over to I wanted to ask a couple of questions on the pre licensure of the hybrid campus. Historically, I think you've been talking about July for your 1st class starts there and now you're talking about September. What was the deciding factor there as to why that moved a couple of months? Yes. And it's really just an issue of how long the build out is going to take. I'll give you a little bit of color on that. The building that we're going to launch in is actually owned by HonorHealth. It's on the north side of Phoenix, right at the junction of Interstate 101 in 17 for those of you that know the Phoenix area. The building up until recently was actually a daycare center. And so as a consequence, it took us a period of time to get the architectural plans completed. And then subsequently, of course, we have to get that approved by the City of Phoenix. And then finally, it's a pretty significant build out plan given the changes to the building itself in order to turn it into a world class nursing campus. So we're looking right now at the completion of the building itself is going to be in the July timeframe. And because we don't have a semester that begins in August, our next semester, of course, would then be September. Okay. And you also talked about, given the depth that you've got now, you can pursue continue to pursue kind of growth in all vectors. This additional the I know you're talking about calendar 2020 before you start biting off 2 per year, but will they be are you envisioning this being similar to HonorHealth where you go into the next hybrid campus with a partner like that or will it be kind of a standalone Aspen location? So as we look at other cities, both inside the state of Arizona as well as other states outside of Arizona, the first thing that we have to accomplish is implementing a corporate partnership with a significant healthcare institution to lock up the clinical places that are necessary to launch a new campus in a given metro. When we get into those partnership discussions, it can go either direction. If it makes sense for us to put a campus inside the healthcare organizations, real estate location, then that would be something we'd love to do. In some cases, it's not possible, in which case we would launch Aspen on its own like we did our inaugural campus. So I think over time, you'll see us do both of these implementations depending on the situation. Okay. And then last question, you kind of hinted at you touched on it a little bit, but your most recent announcement in which you talked about the new debt facility, you basically said, hey, we haven't drawn down the revolver, we haven't taken anything out on the debt, but you're talking about interest expense in Q4. So how much are we talking about taking on here in the near term? And then could you give us an interest expense, if not for Q4, then maybe for fiscal 2020, just for modeling sake? Sure. So the $10,000,000 term loan that we just did is a funded facility bearing interest at 12%. So that will incur cash interest of $100,000 per month. There were also some warrants issued on that. So we will amortize warrant expense over the life of the facility. We also for the current quarter, the 4th quarter, we're currently in the Q4 right now, we paid or prepaid our $1,000,000 convertible term note and we did pay the interest on that. So we will be expensing that in the current quarter as well. Okay. Thanks for taking my questions. Thank you. Our next question comes from Mike Malouf from Craig Hallum Capital. Please go ahead. Great. Thanks guys for taking my questions. Mike, can we focus a little bit on the pre licensure program for just a second? How can you give us confidence that the level of education and specifically with regards to testing coming out of the program can remain at such a high level that you feel confident in sort of accelerating the program into I'd love to get some color on that. Well, I mean, so I frankly, I feel like we have a world class senior leadership team in the academic side. Doctor. Sherry St. Arnold is our Chief Academic Officer for Aspen Group Bank. And in addition, and of course she came from very strong University, Grand Canyon University. And subsequently we brought in Doctor. Ann McNamara, who's a former Dean of Nursing for Grand Canyon to head up all of our pre licensure programs, from campus to campus, city to city. Anne's history is she never had a year in which she had less than 90% NCLEX scores. So my confidence level and everyone's confidence level at Aspen is very high that we will achieve those similar type of metrics, if not better. And then, when you take a look at at least some early indications from some of the students that joined you last year, how are they getting along with the more hybrid online, offline sort of a lot more online programs versus maybe what Anne was working at, working with Grand Canyon? Yes, Ani. So I guess the best way to view this is to look at the persistence rates. Persistence rates are, I think I indicated that we've only lost 14%. So it's at 86% persistence rates. The students have given us tremendous feedback in terms of how we approach the academics. The knowledge transfer happens online. In other words, the curriculum is online. And then we bring the students in approximately 3 times a week to implement seminars or lectures, if you will. And they follow-up those lectures with actually simulation activities immediately after the lecture. So, and then of course, in year 2 of the core program, the final year is when they go into their actual on-site clinical. So we believe that we're preparing these students at extremely high level and that we're going to have very high NCLEX scores and we're going to do a great job of preparing the next generation of great RNs today in the state of Arizona. That's great. That's really helpful. And then just a quick question. As you look out over the next couple of years for your traditional Aspen nursing students, where do you think does that number stay steady or increase a little bit? Obviously, you're taking some of those some of that assets or a lot of the assets and pushing it towards these higher LTV programs. But the LTV at $73.50 even that was pretty attractive. Is that do you think that can continue to grow slightly or do you think that will trend down over the next couple of years? No, I think our plan is to the enrollments over the last 2, 3 quarters have been relatively flat in that area. And again, we spent Mike, we spent approximately $1,300,000 per quarter in that nursing online core business. And we've averaged in the last three quarters about 9.60 enrollments a quarter, which backs into a very strong cost of enrollment of about $13.50 So from our point of view, we don't see any reason why we can't increase spending again in the coming months. We're expecting similar KPI results. There's no question that the market share is available for us to continue to take and we plan to do so. We've been straddling a little bit of a scenario where we haven't had a tremendous amount of capital and we wanted to make sure that we started to move down the path of getting to adjusted back to adjusted EBITDA positive results. And so that's why we focus our incremental spending in the last 2, 3 quarters into those high LTV businesses, to accelerate that process. Okay, great. Thanks a lot. Appreciate it. Thank you. I show no further questions in the queue at this time. I'd like to turn the call over to Micah Mathews, Chairman and CEO of Aspen Group, for closing remarks. Please go ahead. Great. Thanks, everyone, for your questions. I want to thank everyone for joining us this afternoon, and the team here looks forward to talking with you again soon. Good afternoon. Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.